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Lender of Last Resort and moral hazard

Author

Listed:
  • Goodhart, C. A. E.
  • Lastra, Rosa

Abstract

In this paper we revisit the Lender of Last Resort (LOLR) function of the central bank and the associated moral hazard incentives. We argue that, from an economic perspective, the strict application of penalties to the operation of LOLR actions can make that instrument unworkable. Instead, we suggest that both penalties and publication should only be applied after such LOLR had been in place for a time. Normative frameworks ought to be adjusted in this regard.

Suggested Citation

  • Goodhart, C. A. E. & Lastra, Rosa, 2023. "Lender of Last Resort and moral hazard," LSE Research Online Documents on Economics 118679, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118679
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    File URL: http://eprints.lse.ac.uk/118679/
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    References listed on IDEAS

    as
    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    2. Goodhart, C. A. E. & Lastra, R. M., 2020. "Equity finance: matching liability to power," LSE Research Online Documents on Economics 103754, London School of Economics and Political Science, LSE Library.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    lender-of-last-resort; illiquidity; insolvency; stigma;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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